On December 14th, the SEC adopted amendments to Rule 10b5-1 under the Exchange Act, which provides affirmative defenses to trading based on material, nonpublic data within insider trading cases. The SEC first adopted Rule 10b5-1 in August 2000 to address instances when insider trading liability arises in connection with a traders use or knowing possession of material nonpublic information.
The newly adopted amendments will:
add new conditions to the availability of the affirmative defense under Exchange Act Rule 10b5-1(c)(1) (including cooling-off periods for directors, officers, and persons other than issuers)
introduce new transparency requirements regarding issuers’ insider trading policies and procedures and the adoption and termination (including modification) of Rule 10b5-1 and some other trading arrangements by directors and officers
implement new transparency requirements for executive and director compensation regarding certain equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information
revise Forms 4 and 5 to require filers to identify transactions made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)
In January 2022, the SEC proposed a number of rule and form amendments to Rule 10b5-1 and to related disclosure requirements intended to both strengthen investor protections concerning insider trading and address potentially abusive practices regarding Rule 10b5-1 plans, grants of options and other equity instruments with similar features, and all bona fide gifts of securities on Form 4.
The amendments to Rule 10b5-1(c)(1) now include:
a cooling-off period for directors and officers lasting the later of the following: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (no more than 120 days after plan adoption or modification) before any trading can begin under the trading arrangement
a cooling-off period of 30 days for individuals other than issuers or directors and officers before any trading can begin under the trading arrangement or modification
conditions for directors and officers to include a representation in their Rule 10b5-1 plan certifying (at the time of the adoption of a new or modified plan) that: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5
a limit placed on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans
a limit placed on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period
a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan
The amendments also implement new disclosure requirements, including the following:
quarterly disclosure by registrants regarding the use of Rule 10b5-1 plans and certain other written trading arrangements by a registrant’s directors and officers for the trading of its securities
annual disclosure of a registrant’s insider trading policies and procedures
certain tabular and narrative disclosures regarding awards of options close in time to the release of material nonpublic information and related policies and procedures
tagging of the required disclosures
requirement that Form 4 and 5 filers indicate by checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5- 1(c)
The final rules go into effect 60 days after the adopting release is published in the Federal Register. Section 16 filers will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports that are filed on or after April 1, 2023. Issuers will be required to comply with the new disclosure requirements in Exchange Act periodic reports on Forms 10-Q, 10-K, and 20-F as well as any proxy or information statements in the first filing covering the first full fiscal period beginning on or after April 1, 2023. For smaller reporting companies, the date of compliance is deferred by six months.